'Social Dumping' and Relocation: Is There a Case for Imposing a Social Clause?

Posted: 8 Dec 1998

See all articles by Tito Cordella

Tito Cordella

World Bank

Isabel Grilo

Catholic University of Louvain

Date Written: July 1998

Abstract

Public opinion in Europe seems worried about the effect of lower-wage country competition. In both newspaper articles and in policy debates, the term "social dumping" is becoming more and more popular. In many countries, trade unions worried by the effect of what they call "unfair competition," propose the adoption of a "social clause" protecting domestic markets from commodities produced in countries were minimal labor conditions are not met. We analyze the effects of such a policy in the framework of a vertically differentiated Bertrand duopoly. In particular, we study the effects of such a policy on the relocation decisions of the firms and perform a welfare analysis. The welfare analysis takes explicitly into account the unemployment situation in the domestic country by accounting for the workers' welfare losses due to job reductions following the relocation of firms. We characterize the optimal social clause policy both under domestic welfare maximization and from an efficiency point of view. We show that, on domestic welfare grounds, the case for a social clause policy is weaker the higher the domestic wage and the lower the foreign wage.

JEL Classification: F02, F12, F23, J60, L13

Suggested Citation

Cordella, Tito and Grilo, Isabel, 'Social Dumping' and Relocation: Is There a Case for Imposing a Social Clause? (July 1998). Available at SSRN: https://ssrn.com/abstract=128324

Tito Cordella (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-0043 (Phone)

Isabel Grilo

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium
010 47 43 60 (Phone)

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